Every Country for Itself and the Central Bank for Us All?
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Every Country for Itself and the Central Bank for Us All? R. Neck1
· D. Blueschke1
© The Author(s) 2020
Abstract This paper used a small stylized nonlinear three-country macroeconomic model of a monetary union to analyse the interactions between fiscal (governments) and monetary (common central bank) policymakers. The three fiscal players were divided into a financially stable core and a less stable periphery. The periphery itself consisted of two players with different perceptions of the trade-off between fiscal stability and output growth. Using the OPTGAME algorithm, solutions were calculated for two game strategies: one cooperative (Pareto optimal) and one non-cooperative game type (the Nash game for the feedback information pattern). Introducing a negative demand shock, the performance of different coalition options between players were analysed. A higher level of cooperation leads in general to a better overall outcome of the game, however, with highly varying burdens to be borne by the players. Keywords Dynamic game · Nash equilibrium · Pareto solution · Monetary union · Coalitions · Macroeconomics · Public debt JEL Classification C54 · C61 · E27 · E61 · E63
Introduction The European Sovereign Debt crisis, which was triggered by the financial and economic crisis of 2007-2010, hit several countries, mainly in southern Europe. Greece is the most well-known example of this crisis as it experienced several bailout programs and is still struggling with high public debt and unprecedentedly high unemployment. In the financial crisis, fiscal policymakers generally agreed on a set of actions and reacted to this shock with expansionary policies, both through discretionary measures and automatic stabilizers
R. Neck
[email protected] 1
Alpen-Adria-Universit¨at Klagenfurt, Klagenfurt, Austria
R. Neck and D. Blueschke
supported by an expansionary course for monetary policy. In contrast to this coordinated response to the financial crisis, in the case of the debt crisis, there was no such general agreement on how to resolve the financial stability issues accompanied by declining output. One reason for this can be seen in the heterogeneity of the Euro Area’s state of economic development, combined with the unfavorable effects of the one-size-fits-all monetary union. Monetary policy, and exchange rate policy, in particular, are no longer available to national policymakers in the Euro Area as an instrument, and internal depreciation in an economically weak country, like Greece, does not seem to be a viable option. This led to pressure on the European Central Bank from different forces, with some governments asking for a more relaxed monetary policy to accommodate their expansionary budgetary policies and others pressing for more austerity in terms of sovereign debt and monetary policy directed at price stability. Thus, the European Central Bank is a decision maker in a strategic interaction with different governments that are competing to exert influence on their common monetary policy. The macroeconomic policy
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